CBAK Energy Technology, Inc.

Good day, ladies and gentlemen. Thank you for standing by, and welcome to CBAG Energy Technologies' third quarter 2021 earnings conference call. Currently, all participants are in the listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at a time. As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time. Now I'd like to turn the call over to Mr. Terry Lee, investor relations director of Seabag Energy. Mr. Lee, please proceed.

Thank you, operator, and hello, everyone. Welcome to Seabag Energy's third quarter 2021 earnings conference call. Joining us today are Mr. Yunfei Li, our chief executive officer, and Mrs. Yuna Pei, the interim chief financial officer. We released results earlier today. The press release is available on the company's IR website at ir.seabag.com.cn, as well as from Newswire Services. A relay of this call will also be available in a few hours on our IR website. On the call with me today are Mr. Yunfei Li, Mrs. Yuna Pei, Mr. Wen Wuhuang, the Vice President of Seabag Energy, Mr. Xiu Juntian, our General Engineer, our interpreter, Mrs. Yang. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, forward-looking statements involved inherent risks and uncertainties. As such, the company's actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company's public firings with the SEC. The company doesn't assume any obligations to update any forward-looking statements except as required under applicable laws. Also, please note that unless otherwise stated, all figures mentioned during the conference call are in U.S. dollars. With that, let me now turn the call over to our CEO, Mr. Yunfei Li. Mr. Li will speak in Chinese and I will translate his comments in English. Go ahead, Mr. Li. Thank you, Terry, and hello, everyone.

Thank you for joining our earnings conference call today. China China China China China will produce positive business results and increase our supply capability. We have made a strategic decision to accelerate the installation of Dalian's new production line. This is very necessary, because we have long denied the demand. This timely response has increased customers' confidence in us and helped us achieve more market orders in the third quarter,

I am very pleased with our rapid revenue growth from high-power lithium batteries, which saw a 51% year-over-year growth to reach $9.6 million USD and is a testament to the excellent quality and performance of our battery products. I am also happy to report that the new installations in Dalian and Nanjing plants are all on track and progressing according to schedule, despite the global energy shortage and a new round of commodity price hikes. We believe our production expansion will yield positive business outcomes and amplify our ability to supply as we continue to build sales momentum in line with the global demand for clean energy-based products. In the third quarter, we also made a strategic decision to accelerate the new product line installation in Dalian, which was necessary as demand was exceeding our supply. This timely response increased the confidence our customers have in us and help us secure more orders. As it's our priority to meet the vigorous and various demands for our existing battery products and our ongoing innovation, we further expanded our research and development while broadening our product offerings. Overall, we believe our operations and growth strategies are well executed and ensures our position for capturing tremendous opportunities in the battery storage market.

Now, I would like to share with you the latest progress we have achieved in terms of innovation and expansion of product combination after our tireless efforts in the field of R&D.

I would now like to share with you some recent advancements we have made in innovating and expanding our product portfolio following our dedicated efforts in research and development. 八月,我們專為超低溫應用設計的特殊26650鋰離子電池獲得了世界領先的測試檢驗和認證公司SGS的性能認證。 In August, our special 26650 lithium-ion battery designed especially for ultra-low temperatures received a performance certification from the world's leading testing, inspection, and certification company, SGS. Our subsidiary Dalian Seabag Power Battery is the world's first company to receive certification for this unique battery. We believe this is a remarkable step forward that validates the operational efficiency of our special 26650 battery and our technological leadership in the industry. Our customers have been testing our samples and we have seen growing demand for this product that is suited for use in extremely low temperatures, such as in China's northern region, harsh weather conditions, as well as for the aviation and aerospace industries. We expect a special 26650 battery among our product portfolio to generate superior performance and results. Invitational T-shirt.

The production of two-wheeled electric vehicles has been greatly improved. With the help of new equipment and improved production technology, the unit capacity of this new battery is larger than that of the 26650 battery, but the manufacturing cost has decreased significantly. This battery is expected to reach the conditions of commercial production at the end of the year.

In the third quarter, we replaced the expansion of Model 26650 batteries with the newly added production line of Model 26700 batteries to upgrade the original product. As of the end of September, we completed a shakedown test for the Model 26700 batteries, which have garnered positive responses from two-wheel electric vehicle producers. Supported by new equipment and improved production process, This new battery has a bigger unit capacity than Model 265O battery, but at a significantly lower cost. The new battery will be ready for commercial production by the end of the year. 同时,我们还完成了针对LEV市场的32140电池的测试调试, 凭借我们一流的性价比和

Meanwhile, we also completed a shakedown test for the Model 32140 battery that targets the LEV and EV market. With our stellar price-to-performance ratios and ability to address diversified client needs,

we expect our product offerings to resonate across a growing customer group, making us become a major battery supplier for top LEV manufacturers. Based on your teaching.

Our development in the last two years has also reflected that our capacity is expanding as planned. We are very interested in the progress of expansion. Our developments in the latter two new batteries also reflect that our capacity expansion is being carried out as planned.

We are extremely pleased with the progress we are making in building new production capacity. Our expansion is a strategy meticulously prepared for further growth that will extend far into the future. Once completed, its output along with our existing capacity will better support us to cater to the increasing demand for our innovative and reliable battery products. Thank you very much.

Next, I would like to introduce the progress of Zhejiang and Meidu HaiChuang LiJian Technology Co., Ltd. for most of the stock acquisition. HaiChuang is China's leading three-pronged supply chain and political material developer and manufacturer. At the same time, it is also our main shareholder. We are currently transferring assets according to the existing legal procedures. This process is longer than expected, but we are still working hard to complete all the procedures We believe that this strategic integration of stable raw material supply will not only benefit us in the short term, but also bring long-term value to our business and growth strategy, and encourage us to work hard to establish

一种创新的关于储能和电动汽车电池解决方案的生态系统。 Next, I would like to bring updates of our progress in acquiring a majority of equity interests in Zhejiang Meidu High Translithium Battery Technology Corporation, who is a leading developer and manufacturer of ternary precursors and castle materials in China, and is also one of Seabed Energy's key suppliers. We are currently in the process of its asset transfer per required court proceedings. This process is taking longer than expected, but we are still making efforts to complete all the proceedings and close the transaction. Upon the completion of this transaction, we believe this strategic consolidation for a stable supply of raw materials will not only benefit us in the short term against the backdrop of rising commodity prices, but also bring long-term value for our business. growth strategies and fuel our endeavors in building an innovative ecosystem-based solution for power storage and electric vehicles.

and strategic integration, we have the ability to grasp the growth potential of the wide market. After the global economy recovers, there will be a greater growth scale. This year and next year will be the time for us to consolidate our technical advantages and expand our production capacity. Through these continuous innovations and preparations, we will persevere to create value for shareholders and full of confidence in the future development.

To summarize, we see an ever-increasing demand driving the battery industry with society's technological advancements. By leveraging our innovative and expanding product portfolio, capacity ramp-up, and strategic consolidation, we are well-positioned to grasp the growth potential of this fast market, which will be even greater once the global economy recovers. It's time for us to cement our technology strength and expand manufacturing capacity this year and the next. With these ongoing innovations and preparations, we remain confident for our future development while maintaining our commitment to always generate value for our shareholders. Thank you very much.

Next, please introduce the company's financial performance to the investor.

Now let me turn the call over to our interim CFO, Yuna Pei, who will provide details on our financial performance. Go ahead, Mrs. Pei.

Thank you. Thank you, Mr. Rinfei Li. And thank you, everyone, for joining our call today. I will now go over our key financial results for the third quarter of 2021. For the full details of our financial results, Please refer to our earnings press release. In the third quarter, our financial performance for battery sales remained strong, reflecting robust demand for our industry-leading and dependable products. Net revenues were $9.6 million in the third quarter, excluding revenues from raw material trees. approximately $9.6 million was from high-power lithium battery business, a 51% year-over-year growth from high-power lithium battery revenues in the same period of 2020. We didn't incur new raw material transactions during this period. Before our move to buy a majority of equity interests in hatcheries, Transactions such as trading raw materials for batteries were only made when suitable opportunities arose, which did not occur in the third quarter of this year. However, once we complete the acquisition of the equity interest inheritance and consolidate its financial accounts, we expect to see more opportunities and revenues from raw materials. Additionally, as Mr. Li had mentioned, the new production line installation in our Dalian plant had a temporary adverse impact on existing production line, while our production in the future will be supported by both our existing and newly established production capacity. Cost of revenues fell 9% to $1.5 billion. as this drove to control costs to counter the increase in raw material prices. Our previous efforts to lock in the supply of certain raw materials helped us to avoid a bigger blow from commodity price hacks. Meanwhile, along with our peers, we have reduced battery prices to offset the impact from growing material prices, which our customers have accepted as the increase in battery prices is within a reasonable range. Our gross profit was $1.1 million in the third quarter, down 17% from a year earlier. Gross margin was 12%. a decrease of one percentage point from the previous year. The inflation of the price of raw materials resulted in the increase in costs. Total operating expenses rose 339 percent year-over-year to $4.3 million. Most of the increase in all operating expenses categorized was due to growing headcount. and the research and development expenses associated with our Nanjing production facility, as well as the expiration of the Chinese government's COVID-19 relief policy that had reduced the social insurance contributions during the pandemic. Of that, research and development expenses were $1.8 million, up 307% year-over-year. Sales and marketing expenses increased 200% to $0.5 million. General and administrative expenses rose 191% to $2.2 million. As we managed and improved the customer relationships and the quality of our customers, we recovered $0.2 million of doubtful accounts compared to a recovery of $0.4 million a year earlier. Our change in sale value of warrants was $23 million in the third quarter compared to nil in the prior year. Thus, we were able to generate net income of $20 million during the period compared to net income of $41,715 in the same period of 2020. As of September 30, 2021, our cash and cash equivalent reached $2 million compared to $33.3 million as of June 30, 2021. With our solid financial position, we are fully capable of enhancing and expanding our product offerings with increased production capacity, setting us on track for further growth and success into the future. That concludes our prepared remarks. Let's now open the call for questions. Operator, please go ahead.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to withdraw your request, please press the pound or happy. Please stand by while we compile the question and answer roster. Once again, ladies and gentlemen, star 1 for questions. Our first question comes from the line of Laura Liu from Stone Struct Group. Please go ahead.

Good evening, everyone. So I have a couple of questions about the company strategy and also the structures. So my first question is about the revenue strategy of the raw materials and like who are the customers and why was the sale suspended?

Okay, so first we have a question from Ms. Liu. She wants to ask a few questions. The first one is about the company's strategy and structure. The second one is about our revenue strategy. To be precise, what is the revenue strategy of the raw materials? What kind of customers do our company sell raw materials to? Mr. Pei and Mr. Wang, please answer this question. Thank you. I will answer this question.

Regarding the company's revenue strategy for raw materials, The revenue of the raw materials we reported in the same period last year is from the raw material transaction we made. At that time, based on the industry's judgment, some of our raw materials were priced at a lower price, so we carried out a trading operation to make profit. The revenue of this part is not our regular income. but based on the market price fluctuation. In this quarter, we have no raw material trade, so we don't have any sales income. But we announced a few months ago that we are acquiring a raw material manufacturer, HaiChuang. The company's main business is raw materials. and the production and sales of raw materials. So in the future, after we complete the acquisition, the company's revenue from raw materials will grow significantly. This growth will also become the company's usual income. In the future, this part of the revenue will come from the production and sales of raw materials, and not from past trade.

The revenue related to the raw material sales reported in the same period of last year came from our raw material futures trading. At that time, based on our industry experience, we found that some raw materials were at a low price. So we did some transactions and we did generate profits. However, this part of revenue does not belong to recurring revenue. It just came from an action that we took in response to the fluctuation of the market price. In this quarter, this year, as there was no futures trade in raw materials, so this part of revenue didn't exist. However, a few months ago, our company announced that we are in the process of acquiring Hytrance, a raw material manufacturer committed to R&D, production and sales of ternary castled materials and ternary precursors. Therefore, after the completion of the acquisition, our revenue from the raw material will have a substantial increase and become a recurring revenue of our company. In the future, this part of revenue will come from the production and sales of raw materials rather than the futures trade reported last year. That's it for the translation. Any other questions?

Yeah, thank you. That's great. The next question is about the EV companies, like the manufacturing plants. Some companies, they have very attractive plants. What do you think of the market opportunity over there, and who are the major customers in the EV market?

好,那下面一个问题是关于我们发现现在市场上有很多EV相关的这个电池的企业,他们都有一些宏伟的大规模的扩产的这样的一个计划。 那我们公司是怎么样看待这个市场机会的?

Okay, I will answer first, and Mr. Wang will help me to add. This is how we see it. Now, the EV market has entered a stage of self-development. That is to say, the EV market is getting more and more explosive, and the awareness level is getting higher and higher. So, the EV market has a positive growth. After that, there will be an increase in investment by multiple companies. This is also understandable. Then we are also in this market In the early 2020s, it also began to set up this market. In our case, we are more interested in the A00 class A0 class This small passenger car market Then this market In the recent two years, the growth trend is very fierce. Especially in recent years, the mini models of the sales ranking champion The monthly sales volume is more than 30,000 So we also take this type of model as our target market. In recent years, we have also been in contact with many companies of this type for this project. And they are very interested in our batteries. And we also have a variety. So now our goal for this market is to use the volume of this type of car as our production capacity. In the future, we will also take a step to set up high-end models. For example, we will be working with

We believe that the EV market has really entered the market-oriented self-sufficient stage, and we can see that EV has become more and more popular among the consumers as a result. the EV market will usher in a robust growth era. That is why many battery companies have dedicated more input to stepping up production capacity. And we were full aware of this opportunity. As a matter of fact, we began to formulate our strategy as early as the second half of 2020. We paid more attention to the AOO and AO small passenger car markets, which has a strong growth momentum in the past two years. Recently, the monthly sales amount of many models have ranked the first in sales, with a monthly sales amount of over 30,000. We also see producers of such models as our target customers, Lately, we organized some meetings for business cooperation with quite a few manufacturers of this kind, and they also expressed their interest in cooperation with us. Our goal is to ramp up our production capacity for mini models as a start, and then we're going to scale up and extend to more high-end models. And for our large cylindrical batteries, we will target at this kind of high-end market. That's it for the translation.

Thank you. So my last question is about the structure and also the risk. So is the company operating under the VIE structure? And how about the auditor side? Like is the auditor PCAOB certified? and if there's any delisting risks. 好,那第三个问题是关于架构的问题。 我们公司是不是这个VIE的这个架构的? 那这个我们公司的审计是不是在PCAOB注册过的? 这个问题请我们CFO裴总来回答吧。 好的。

Our company is not a VIE structure. We are a company that directly controls the stock market in the United States and directly controls the stock market in Hong Kong. We are a company that directly controls the domestic operation of Hong Kong companies. Our structure and the traditional Internet companies have their own differences in the VIE structure that directly controls the stock market through the operation agreement. Our current structure is less risky for investors. Regarding our audit office, CJD, Zhongzhengda, they are registered at PCAOB and HK's Accounting Association HKSAPA. It is a very important accounting office. The company faces a very small possibility of disbanding due to the reason for the merger. We hope that investors will pay more attention to the risk caused by stock fluctuations.

Thank you. CPAC is not adopting VIE. Our listed entities in the United States directly control the entities in Hong Kong, and the Hong Kong company directly holds subsidiaries operating in China. It is essentially different from the structure of the traditional Internet companies who indirectly control the operation subject through operation agreements. The risk with us is much, much more smaller than for the investors. Our auditor, CZD, is registered in PCAOB and HKICPA and it is a legal accounting firm, there is little possibility that our company will be delisted due to non-compliance issues. And what the investors should pay more attention to is the risk posed by stock price fluctuations. That's it for the translation.

Okay, these are great. Yeah, these are all my questions.

Thank you very much.

Thank you. Our next question comes from the line of Rambir Mark from MSBM. Well, please go ahead.

Hi, I wanted to know, so a lot of people have taken control and supplying the EV market, but there's no news of what CBAT is doing itself. So there's a lot of talk, but there's nothing on your website or what your plans are going forward. From the last update, it seemed as if there was going to be quite a few bits going forward, but nothing announced. Could you state why?

Okay, so about Mr. Ma's question, about the EV market, we have had some related reports on the website, but recently there have been no specific operations or landing policies announced. Can you explain why there has been no update on this recently? This question is for Mr. Wang and Mr. Tian to answer. Sorry, please repeat the question. Can you explain why you didn't do any updates on this?

This question is for me to answer. Currently, we are working on the layout of a large park in Nanjing. A large park similar to the one in Telsa. Our initial intention was to use the LE and the A00 cars and low-speed vehicles. At that time, our focus was on mm-hmm

As I mentioned, we have started our strategy rollout as early as the second half of last year, and we started the installation of the production line in Nanjing, and it is designed for the production of the large cylindrical batteries. which can be used for some vehicles such as Tesla. And then at the time, what we plan to focus on is the LEV markets and the AOO passenger vehicles. However, this year we found that the market has become more hot, and then we also find that quite a lot of car manufacturers are in shortage of the supply of batteries. That is why we made a timely adjustment and we decide to shift our focus to EV. So EV will be the focus and the priority of our current stage, and will also be the priority of our future development. Okay, thank you.

First of all, I am in charge of technology here. From a technical point of view, Any product development of a whole car factory has a very long development cycle. In the early stage, it takes three years. In the past two years, due to the development of industrialization, the development cycle of a whole car factory has been greatly shortened. But even so, it will take more than a year to develop and design a product. When we are in contact with the whole car factory, we have already participated in the production of the battery I am responsible for the technician part.

If I see this question from the perspective of technician or technology, I have to say that the development period for a product in a car manufacturer used to be very long, as long as, let's say, three years. However, with the development of industrial technology, this development period has been shortened. However, it still needs more than one year to do the R&D and product design. And the advantage with us is that we get involved in the design phase. when the common nature feature has started to design their products. And our involvement plays a very positive role in this period or in this whole process.

The selection of this work has been done. Our early development products are already in the testing stage. Of course, this specific model is not announced here. It is a product of the 46 series selected by Da Yuanzhu. In addition to the domestic whole car factory, the domestic whole car factory is also very interested in our Da Yuanzhu products, including some of Dexi's three-car carriage.

And in China, we have already developed some substantial partners, such as the Jianghuai Automotive and Cherry Automotive. When I talk about substantial cooperation, it means the selection of the product models and then the R&D of the products. I can tell you that the production under our partnership is already in the phase of pilot production, and I cannot release the exact model here in front of you, but I can tell you that it is it is in the 46 series of our products and if we have a look at the overseas markets some foreign common features also show their interest in our products such as some German companies they are also very interested in these products hmm

Based on the achievements that we've made in the previous period, we can say we are really confident in our future performance.

we believe that we can have a remarkable performance in the EV market in the future.

So you've had interest, but is there any significance of signing up any of these deals with

So we are at the stage of technical discussion. And then as for informal agreements, you need to refer to the announcement that we will probably publish on our website or some official channels.

Okay, thank you.

All right, thank you. Seeing no more questions in the queue, let me turn the call back to Mr. Yunfei Li for closing remarks.

Thank you. Thank you, everyone, for participating in this phone call. We look forward to reporting new developments next time.

Thank you, operator, and thank you all for participating in today's call and for your support. We appreciate your interest and look forward to reporting to you again next quarter on our progress.

Thank you all again. This concludes the call. You may now disconnect.